Introduction to FredBrain via a Labor Market Analysis 🧑‍💼

The Labor Market is a central topic in today’s economic discussions, consistently surpassing expectations and fueling debates about its implications for both domestic and global economies. Amidst global market instabilities and ongoing disruptions in supply chains, compounded by geopolitical tensions, the performance of the U.S. Labor Market remains robust and resilient. This strength stands in stark contrast to the recessionary trends and stagnation seen in various other regions worldwide.

Unveiling the Hidden Realities 📖

What implications does this hold? If the American economy continues to display records labor market figures whilst the S&P 500 surpasses the 5,000-point milestone, one might wonder if Americans are experiencing unprecedented prosperity or, have other other economic indicators, such as rising living costs, negated the benefits of this growth for the average American.😓

Data is key 🔐

To answer such questions data is essential. Which is why FredBrain was designed to simplify the integration of economic data into various projects, whether for personal use, organizational data management, or academic research. With added MySQLBrain and GPT integration, it facilitates a smoother workflow for analyzing and leveraging economic insights. Further documentation and installation instructions can be found on PyPi.org - FredBrain

The analysis - A fog of Growth? 👩‍💻

To uncover answers to our questions we will be analyzing numerous indicators from the FRED API via the FredBrain package which will give us insights into both the Labor Market as well as the prosperity of American Citizens. The analysis will comprise of visualizations, statistical analysis as well as modeling and also include feeding ChatGPT 4.0🤖 the data to explore how modern AI solutions can support us in analyzing and processing key economic indicators.

Analysis Outline:

• Chapter 1. Data Visualization and Exploration
• Chapter 2. Statistical Analysis and Modeling
• Chapter 3. Letting GPT Analyze the Dataset, Visualizations and Models Independently and Contribute a Response

The code used can be found within the following Notebook Link -

Author

Alexander Richt

Strategic Data and Investment Analyst

I am dedicated to continuous professional development and thrive in roles that merge technical expertise with strategic oversight. I am committed to leveraging innovation in programming, modeling, and analytics to drive tangible results in the corporate, investment and finance sectors.

Credentials: CFA Charterholder & MSc. in Economics with a focus in Econometrics

alexander.richt1@gmail.com
LinkedIn Profile
GitHub

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Chapter 1 - Prosperity or Struggle

Unemployment Rate

The unemployment rate is an important indicator as it gives us valuable insights into the proportion of unemployed individuals within the labor force. High unemployment levels suggest an economic downturn, characterized by a scarcity of available jobs or limited hiring activity among companies. Conversely, low unemployment rates typically indicate a robust job market, reflecting strong economic health and ample employment opportunities for job seekers. This metric is instrumental in assessing the overall performance of the job market.

Historical Levels of Employment

As seen below, unemployment rates have been at a historical low stagnating at sub-4% levels after reaching historical highs during the COVID pandemic.

The only time periods were unemployment rates sustained at below 4% levels was in 2001 and from 2018 to 2019 before the COVID pandemic occured.

¹ Unemployed: Includes individuals who do not have a job but are available for work and have been actively looked for work within the prior four weeks as well as those who are waiting to be recalled to a job from which they have been laid off.

Labor Force Participation

Another key metric to the involvement of the work force in the economy is the participation rate.

The participation rate will be the percentage of the population that is either working or actively looking for work and can be a reflection of the overall health of the economy or other isolated trends such as a shift in the age of the population or behavior of certain demographics in the population.

Twilight of Tenure: The Departure of the Aging Workforce

The current data suggests that we are experiencing significant downward pressure, with the labor force participation rate at its lowest in the past half-century. This downturn is most likely a reflection of the aging demographic of the US population, contributing to sustained low unemployment rates below 4% as well as underlying systemic changes in the labor market. The retirement of a substantial segment within the workforce opens a gap, necessitating the filling of positions that become vacant.

Changing Behaviors

Additionally, we can see how the participation of certain age groups has also impacted the aggregate long term development of the Labor Force Participation. Key takeways from below are:

• 16-19 Years: With the increasing necessity of higher education by today's employers, we can see how dramatically the workforce participation of this age group has fallen as more younger individuals are attending a 2 or 4 year university before entering the workforce.
• 20-24 Years: A slight downward trend in this demographic may correspond to more individuals pursuing advanced degrees, such as Master's or Doctorates, than in the past.
• 25-54 Years: Despite common media and social media criticism towards younger generations, the labor force participation of the 'prime-age' demographic (25-54 years) has been consistently high, even showing a slight uptrend.
• 55 and Over: Either suprisingly or not suprisingly, this segment of labor force participation has increased at quite substantial levels. This may be a reflection of the fact that in today's economic & political climate, individuals have to work longer than ever before reaching the financial circumstances neccessary to achieve retirement between private and state savings.

The data underscores complex socioeconomic factors influencing labor market dynamics, including education trends and financial security.

¹ The labor force ecnompasses individuals 16 years of age and older who do not reside in insituitions (e.g., penal and mental facilities, homes for the aged) and are actively participating in the workforce by currently holding a job or by actively searching for one.

Population Demographics and Their Impact on the Labor Market

Understanding population demographics is crucial as they offer insights into prevailing trends within the labor market. The accompanying visuals highlight notable trends in different age cohorts and the foreign-born population, revealing patterns significant to our analysis.

Aging Workforce

As we can see below, both population demographics for the age groups of 25-54 years of age as well as the 55 years of age show an upward trending trajectory over time with quite steep slopes (occassional flatness also present). However, the slope of the 55 years of age and older population group is steeper than the slope of the 25-54 years of age group which further supports that the expanding aging workforce is contributing to a widening labor supply gap, as these demographic shifts influence fluctuations in labor force participation and unemployment rates. The apparent correlation between the increasing number of individuals not in the labor force and the rising population aged 55 and older reflects this argument and is particularly striking. The parallel slopes of these two lines suggest that as more people enter the older age demographic, a similar proportion is also exiting the labor force and increasing labor supply pressure.

The Role of Migration in Labor Supply

Furthermore, the trend reflected within the 2nd graph plotting the population of foreign born workers suggests a growing contribution of migrant workers to the labor market, potentially mitigating the impact of an aging native workforce and support the idea that a widening labor supply gap is causing the market to look outside of the domestic market to fill neccessary roles.

Upcoming Analysis in Chapter 2

In Chapter 2 of the analysis (as mentioned in the introduction), we will attempt to model out the correlations and the given coeffecients between these variables for additional insights on how much impact shifting age demographics may currently be having on both the unemployment rate as well as the labor force participation rate.

The Great Battle of Filling Jobs

The 'Great Battle of Filling Jobs' underscores a critical inflection point for the economy, where the labor resources needed to meet business needs is being fundamentally challenged. As we move further from the initial shocks of the pandemic, it's evident that the job market is undergoing a transformation, reflecting deeper trends than the immediate effects of economic reopening.

The graph illustrates a steady rise in job vacancies over time reaching sustained unprecidentent levels, with a slope that suggests a persistent and growing gap between available positions and the workforce ready to fill them. This gap points to systemic changes in the employment landscape, influenced by an aging population and evolving workforce behavior.

Working Hard or Hardly Working?

Despite labor market supply pressure, the existing labor force is not working longer hours in response. Instead, if we take the figures at face value and that the given data collected is of high quality, the overall number of weekly hours worked has been rather stable over the last 20 years.

The Almighty Dollar

Median Weekly Real Earnings reflects the earnings of a typical worker in today's economy adjusted for inflation such that earnings and purchasing power can be compared over time.

Currently, the labor market features historically low unemployment rates alongside sustained high levels of job vacancies. In such a market, one might expect real income for workers to not only improve but also to outpace inflation due to heightened demand for labor.

Overtime, we can see that earnings have gone through cycles of growth and decline but overall since 1979, Real Earnings Growth has been 9 percent. However, the recent surge in inflation, especially since the pandemic began in 2020, has exerted considerable downward pressure on purchasing power, visibly affecting Real Earnings Growth.

The Price of Gender

The future of innovation and leadership embraces talent irrespective of gender. Despite significant improvements in the gender pay gap, disperaties remain present. The graph below delineates the wage gap between men and women using shaded areas in both the initial and past time periods. In 1979, the wage gap stood at nearly 40%, a stark contrast to the more narrowed gap of 16% today. While women's real earnings have increased by 31% since 1979, the journey toward gender parity continues.

Alienated Males

As can be often heard from mainstream media, a sentiment of alienation among segments of the male population exist today. Notably the data reveals that the average male today has slightly less purchasing power than their counterparts in 1979, with real earnings seeing a marginal decline of -3.7%. This statistic highlights the broader economic challenges that can contribute to such feelings of disenfranchisement by men in todays economy in comparison to those of their forfathers.

Are Workers Better Off?

To deepen our understanding of how earnings have evolved, and whether society has benefited from economic growth, we will continue to examine various factors such as:

• CPI Indexes: Analyzing Consumer Price Index (CPI) data helps us understand inflation trends and their impact on real earnings.
• Corporate Earnings Growth: Comparing worker earnings growth to corporate earnings growth can provide insights into how economic benefits are distributed within the economy.
• Debt as a Percentage of Disposable Income: Understanding how the levels of debt of Americans on average has developed over time
• Economic Inequality: Investigating how earnings growth has been distributed across different segments of the economy can shed light on broader socio-economic trends and inequalities.

¹ 1982-1984 CPI Adjusted Dollars refers to using the given time period as a "baseline" to adjust earning figures to reflect what the dollar was worth during that period, allowing us to compare the development of earnings over time on a comparable basis ² Purchasing Power refers to the value of money expressed in terms of the amount of goods or services that one unit of money is able to buy today

What is "CPI"?

A commonly heard but often confusing term, Consumer Price Index (CPI) is an aggregate of prices paid for a given basket of goods and reflects the percent change in prices relative to the reference base - which in this case is 1982-1984. The standard indexes used represent roughly 88% of the total population with the intent to capture the habits of the average consumer.

CPI's are based on the following basket of goods:

• Housing: Includes rent, owners' equivalent rent, and utilities but excludes actual home purchases.
• Food and Beverages: Encompasses both groceries and dining out expenses.
• Apparel: Covers clothing and footwear for all age groups.
• Transportation: Accounts for vehicle purchases, fuel costs, and public transport fares.
• Medical Care: Includes health services and medications.
• Recreation: Consists of leisure goods and activities.
• Education and Communication: Involves tuition fees and communication services.
• Other Goods and Services: Personal care products and services, tobacco and smoking products, haircuts and other personal services, funeral expenses.

Each component of the CPI has different weightings which reflect the spending habits of the households surveyed for this purpose. This structure of the index attemptd to provide a comprehensive view of the cost of living and inflation trends in the economy but is limited in the sense that it suffers from the following shortcomings:

• Home Ownership: Rather than tracking the actual prices homes, the CPI uses a concept called "owners' equivalent rent" (OER) which represents the amount homeowners would pay to rent their homes in a free market
• Insurance: Health or Life Insurance costs
• Substitution Bias: As the CPI focuses on a Typical Basket of Goods it may not fully account for changes in consumer behavior which cna result in substituting between goods as relative prices and available products change

Inflation: A Neccessary Evil

A question that to many feels as old as time is if steadily growing the money supply and managing a target inflation rate is critical to the long term growth of an economy. As tends to happen every few decades, we are reminded of the subtle power of monetary policy and the influence any given central bank can have on our lives.

As we all have experienced recently, inflation has disrupted our lives in one way or another. Inflation is typically seen as a sign of a growing economy, but it needs careful management to prevent excessive increases that could destabilize economic conditions.

But why would we want any inflation at all?

• Stimulates Economic Activity: Moderate inflation encourages spending and investment.
• Reduces Real Debt Burden: Inflation decreases the real value of debt over time.
• Prevents Deflation: Helps avoid deflationary spirals which can stall economic growth and result in rising defaults as property values fall.

The Cost of Living Crisis

In the visualizations below, we can directly see the speed at which inflation lost control in all aspects of our lives. Each bar chart shows the Year-on-Year (YoY) change for a specific CPI category from 2016 to 2024.

CPI: Core (Excluding Food & Energy)

• Trend: Gradual increase in inflation rate until 2022, followed by a notable decline.
• Interpretation: The peak in 2022 suggests inflationary pressures in core CPI components eased, possibly due to economic stabilization or policy interventions.

CPI: Rent of Primary Residence

• Trend: Steady rise through early 2022, peaking sharply then gradually declining.
• Interpretation: Indicates significant rises in rental costs, peaking in 2022 possibly driven by housing market constraints. The decline may reflect market adjustments or changes in housing policies.

CPI: Used Cars & Trucks

• Trend: Volatility with a sharp spike in 2021 and a sharp decline afterward.
• Interpretation: The 2021 spike can be attributed to supply chain disruptions, notably the global semiconductor shortage impacting automobile production. The decline suggests a resolution or adjustment in consumer demand.

CPI: Groceries

• Trend: Significant rise peaking in 2022 before falling sharply.
• Interpretation: Likely related to disruptions in food supply chains or increased agricultural input costs. The drop suggests normalization of supply chains or improvements in agricultural production.

CPI: Dining Out

• Trend: Steady increase up to 2023, peaking then slightly dropping.
• Interpretation: Reflects rising costs in the restaurant industry, potentially due to increased labor and ingredient costs. The peak in 2023 could indicate a pricing threshold impacting consumer spending.

CPI: Housing

• Trend: Consistent increase, particularly sharp from 2020 onwards.
• Interpretation: Indicates ongoing inflationary pressures in the housing market.

General Observations

These trends highlight the diverse economic, policy, and environmental factors influencing price levels across different sectors. The data provides valuable insights into the complex nature of inflation and its varying impacts on different segments of the economy.